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An Oil Story

The story of oil has been the story of America since the Second World War. Cheap fuel and the availability of the automobile has transformed America into a land of sprawling suburbs, large homes, and long commutes. Oil has literally powered American lifestyles and culture in a way that no other single factor has.

The cost of oil has nearly doubled since last year.

Oil production world wide has been essentially flat since January 2005, hovering between 83 and 85 million barrels a day.

Since 2002, the price of oil has increased nearly five times. The dollar has fallen 50% versus the euro in the period, and now is at a 20-year low.

Global demand for oil has not slackened in the face of ever-higher prices.

And while the amount of energy used per unit of Gross Domestic Product (GDP) has improved in the United States (meaning that we are more economically productive and efficient for the energy we use), it is difficult to imagine our economy not being limited in some respect by limited sources of energy.

The former head of Saudi oil production, Sadad Al-Husseini, and Texas oil billionaire T. Boone Pickens, both stated in November that they believed that world oil production has peaked, essentially that, globally, the world will never produce more oil than it does today.

And that doesn’t even begin to touch upon the realities of climate change.

While many economists believe that oil price shocks have been partially decoupled from overall economic growth– especially when there are not big disruptions in the supply, every recession in the United States since World War II has been preceded by a run-up in the cost of oil.

A study from the French Institute of Petroleum by Lescaroux suggested that a ten dollar increase in the price of oil causes a drop from .5% to 5.5% in American gross domestic product (GDP). Assuming that GDP growth in 2007 hovers around 3%, Lescaroux’s math would likely put us in a fairly deep recession next year.

Al-Husseini believes that new oil will not match declining production in oilfields currently in production. He goes further— stating that many of the world’s oil reserves are fiction, “not available for production.” Projecting a base oil price of $166 a barrel in 2015, Al-Husseini is not bullish upon a future of evermore oil.

The rate of oil demand growth has slowed in the developed world, but demand from India and China has urged.

‘‘You look at the globe and ask, ‘Where are the big increments?’ and there’s hardly anything but Saudi Arabia,’’ Al-Husseini said in 2005, in a not-well-reported commentary. ‘‘The kingdom and Ghawar (Saudi and the world’s largest oilfield) are not the problem. That misses the whole point. The problem is that you go from 79 million barrels a day in 2002 to 82.5 in 2003 to 84.5 in 2004. You’re leaping by two million to three million a year, and if you have to cover declines, that’s another four to five million.’’

In other words, if demand and depletion patterns continue, every year the world will need to open enough fields or wells to pump an additional six to eight million barrels a day — at least two million new barrels a day to meet the rising demand and at least four million to compensate for the declining production of existing fields. ‘‘That’s like a whole new Saudi Arabia every couple of years,’’ Husseini said. ‘‘It can’t be done indefinitely. It’s not sustainable.’’

For Americans, the oil story does not have a happy ending. American oil production in the lower 48 states peaked in 1970, and has declined ever since. Prudhoe Bay, in Alaska, is a declining resource as well. The Arctic National Wildlife Reserve, even if drilling were permitted, would take ten years to come on line, and would be a drop in the bucket of future demands. Conservation and huge investments in alternative resources are the only options.

Renewable energy sources in Colorado— currently that means wind and solar, with geothermal on the horizon— are slated to be 20% of household electricity supply by 2020. That doesn’t even begin to replace the liquid fuel energy needed for the four million vehicles currently filling the state’s roads.